Risks associated with contract negotiation include failure to match expectations of the buyer and tenderer; deadlock on details of agreement; failure to secure mandatory conditions of the tender; unfair or onerous requirements on the tenderer in the contract conditions; failure to reflect the terms offered and agreed in the final contract; and or, inadvertently concluding a contract with a party that does not have contracting capacity.
PURCHASING & SUPPLY: NYASHA CHIZU
Managing these risks might require a restart of a procurement process that inevitably increases costs to the procuring entity, affects production schedules and sales targets in manufacturing and retail sectors respectively leading to loss of revenue, profitability and goodwill.
Where risk associated with contract negotiation is not circumvented, contract disputes; delivery delays; costs variations; reduction in the value for money for the purchase; purchase of less suitable products; inefficient use of resources; possible costs arising from legal action; and the inability to finalise the contract are possible.
The worst of the outcomes is that it could lead to invalid contracts or fully committing to an arrangement, where a party exposes their final position prematurely to someone without authority to conclude the contract.
Contracts in some cases are concluded on unfavourable terms and conditions, leading to a need for a second negotiation.
The negotiation will be to plot a means to dispense with the contract, equivalent to divorce negotiations following a marriage finalised on unfavourable terms and conditions.
Such activities are between two parties, the buyer and the tenderer, but have serious implications of supplier-customer relationships of the buying organisation.
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There is risk of entering into a contract with a party without contractual capacity leading to a void contract. To mitigate the risks, it is important during the invitation of offers to establish that the bid is submitted by someone with authority.
Requesting for submission of “power of attorney” may be necessary in high value and complex projects.
The buying organisation would just need to ensure that at the contract negotiation stage, they are negotiating and concluding contracts with a party with adequate capacity to do so.
To ensure that the minimum terms and conditions stipulated in the tender document are included in the final contract, a checklist of these items maybe necessary to guide the procuring entity to plug all loopholes.
This is aimed at ensuring that all conditions that qualified the bidder and might have led to the disqualification of others, translate into the final contract.
A copy of the tender document, evaluation report, the bids submitted and the final contract should be kept as a record of the procurement proceedings for purposes of an audit.
Negotiation process require training. It is important to establish the effective strategy of a negotiation.
Some negotiation processes are concluded in a single meeting, an equivalent of a one-day international in a cricket game or a cup game in soccer.
Others are concluded after a series of meetings equivalent to a series cricket match.
It is, therefore, important to distinguish your BATNA [Best Alternative to a Negotiated Agreement] elements and to establish the strategy of offering and counter-offering to reach an amicable solution to both parties and comfortable position for your organisation.
This requires an analysis of the alternatives and risks associated with such, and distinguishing between essential and non-essential goals and requirements.
The issue of training cannot be overemphasised if the risks associated with negotiation are to be minimised.
Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: [email protected] Skype: Nyasha.chizu
